BANKING IN INDIA
- Banking in India originated in the last decades of the 18th century. The ﬁrst Banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct.
- The oldest bank inexistence in India is the State Bank of India, which originated in the Bank of Calcutta in June l806, which almost immediately became the Bank of Bengal.
- This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company.
- For many years the Presidency banks acted as quasi central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India’s independence became the State Bank of India in 1955.
STRUCTURE OF INDIAN BANKING
- As per Section 5(b)of the Banking Regulation Act 1949: “Banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.”
- All banks which are included in the Second Schedule to the Reserve Bank of India Act, l934 are scheduled banks. These banks comprise Scheduled Commercial Banks and Scheduled Cooperative Banks.
- Scheduled Commercial Banks in India are categorised into ﬁve different groups according to their ownership and / or nature of operation. These bank groups are:
1. State Bank of India and its Associates,
2. Nationalized Banks,
3. Regional Rural Banks,
4. Foreign Banks and
5. Other Indian Scheduled Commercial Banks (in the private sector).
- Besides the Nationalized banks (majority equity holding is with the Government), the State Bank of India (SBI) (majority equity holding being with the Reserve Bank of India) and the associate banks of SBI (majority holding being with State Bank of India), the commercial banks comprise foreign and Indian private banks.
- While the State bank of India and its associates, nationalized banks and Regional Rural Banks are constituted under respective enactments of the Parliament, the private sector banks are banking companies as deﬁned in the Banking Regulation Act. These banks, along with regional rural banks, constitute the public sector (state owned) banking system in India.
- The Public Sector Banks in India are back bone of the Indian ﬁnancial system. The cooperative credit institutions are broadly classiﬁed into urban credit cooperatives and rural credit cooperatives. Scheduled Co-operative Banks consist of Scheduled State Co-operative Banks and Scheduled Urban Co-operative Banks.
- Regional Rural Banks (RRB’s) are state sponsored, regionally based and rural oriented commercial banks. The Government of India promulgated the Regional Rural Banks Ordinance on 26th September 1975, which was later replaced by the Regional Rural Bank Act 1976.
- The preamble to the Act states the objective to develop rural economy by providing credit and facilities for the development of agriculture, trade, commerce, industry and other productive activities in the rural areas, particularly to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs.
- The Government of India issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969.
- The need for the nationalization was felt mainly because private commercial banks were not fulﬁlling the social and developmental goals of banking which are so essential for any industrialising country.
- Despite the enactment of the Banking Regulation Act in 1949 and the nationalizations of the largest bank, the State Bank of India, in 1955, the expansion of commercial banking had largely excluded rural areas and small-scale borrowers.
- A second dose of nationalization of6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India.
- Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.
List of Nationalised Banks in India in 2016:
|1||Allahabad Bank||2||Andhra Bank|
|3||Bank of Baroda||4||Bank of India|
|5||Bank of Maharashtra||6||Canara Bank|
|7||Central Bank of India||8||Corporation Bank|
|9||Dena Bank||10||IDBI Bank|
|11||Indian Bank||12||Indian Overseas Bank|
|13||Oriental Bank of Commerce||14||Punjab and Sind Bank|
|15||Punjab National Bank||16||State Bank of India (SBI)|
|17||Syndicate Bank||18||UCO Bank|
|19||Union Bank of India||20||United Bank of India|
RESERVE BANK OF INDIA (RBI)
- The Reserve Bank of India is the Central bank of the country. Central banks are a relatively recent innovation and most central banks, as we know them today, were established around the early twentieth century.
- The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank, which come into force on April 1, 1935.
The Bank was constituted to
1. Regulate the issue of banknotes
2. Maintain reserves with a view to securing monetary stability and
3. To operate the credit and currency system of the country to its advantage.
- The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt.
- The existing currency offices were at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon.
- The Bank, which was originally set up as a Shareholder’s bank, was nationalized in l949.The Reserve Bank of India was nationalised with effect from lst January, 1949 on the basis of the Reserve Bank of India (Transfer to Public Ownership) Act, l948.All shares in the capital of the Bank were deemed transferred to the Central Government on payment of a suitable compensation.
- An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was seen as playing a special role in the context of development, especially Agriculture.
- When India commenced its plan endeavors, the development role of the Bank came into focus, especially in the sixties when the Reserve Bank, in many ways, pioneered the concept and practice of using ﬁnance to catalyse development.
- The Bank was also instrumental in institutional development and helped set up institutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural Development, the Discount and Finance House of India etc. to build the ﬁnancial infrastructure of the country.
- With liberalization, the Bank’s focus shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto developing the ﬁnancial markets.
Regulation of Banks by RBI:-
- The Reserve Bank of India has been empowered under the Banking Regulation Act, I949 to regulate and supervise banks‘ activities in India and their branches abroad.
- While the regulatory provisions of this Act prescribe the policy framework to be followed by banks, the supervisory framework provides the mechanism to ensure banks‘ compliance with the policy prescription.
- The Department of Banking Operations and Development exercises regulatory powers in respect of commercial banks and Local Area Banks (LABs), Regional Rural Banks/District and State Co-operative Banks and Urban Cooperative Banks are regulated by Rural Planning and Credit Department and Urban Banks Department, respectively.
DEPARTMENT OF BANKING OPERATIONS AND DEVELOPMENT
- The Department of Banking Operations and Development is entrusted with the responsibility of regulation of commercial banks and LABs under the regulatory provisions contained in the Banking Regulation Act, 1949.
- Its functions broadly relate to prescription of regulations for compliance with various provisions of Banking Regulation Act on establishment of banks such as licensing and branch expansion, maintenance of statutory liquidity reserves, management and operations, amalgamation, reconstruction and liquidation of banking companies.
- The other important activities of the Department include approval for setting up of subsidiaries and undertaking of new activities by commercial banks.
Urban Bank Department -RBI:-
The Urban Banks Department of the Reserve Bank of India is vested with the responsibility of regulating and supervising primary (urban) cooperative banks, which are popularly known as Urban Cooperative Banks (UCBs). While overseeing the activities of 1926 primary (urban) cooperative banks, the Urban Banks Department performs three main functions:
(i) regulatory (ii) supervisory (iii) developmental.
The Department performs these functions through its Regional offices.
I. Regulatory Functions
(i) Licensing of New Primary (Urban) Cooperative Banks
(ii) Licensing of Existing Primary (Urban) Co-operative Banks
(iii) Branch Licensing
(iv) Statutory Provisions
The regulatory functions of Urban Banks Department relate to monitoring compliance with the provisions of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies) by urban cooperative banks. These provisions include:
a.) Minimum Share Capital:-
Under the provisions of Section 11, The Banking Regulation Act, I949 (As Applicable to Cooperative Societies).
b.) Maintenance of CRR and SLR:-
As in the case of commercial banks, primary (urban) cooperative banks are also required to maintain certain amount of cash reserve and liquid assets. The scheduled primary (urban) cooperative banks are required to maintain with the Reserve Bank of India an average daily balance – in terms of Section 42 of the Reserve Bank of India Act, 1934. Non-scheduled (urban) cooperative banks, -under the provision of Section 18 of Banking Regulation Act, 1949 (As Applicable to Cooperative Societies)
- Supervisory Functions:-
- To ensure that the Urban Co-operative Banks conduct their affairs in the interests of the
depositors and also comply with the regulatory framework prescribed by the Reserve Bank of India, the department undertakes on-site inspection of these banks with frequency ranging from one to two years depending upon the ﬁnancial condition/ status of banks.
- The thrust of supervision is to ensure that banks‘ affairs are not conducted in a manner detrimental to the depositors‘ interest and also to assess the solvency of the bank vise-versa its liabilities, besides examining the banks‘ compliance with the existing regulatory framework.
- The department also undertakes off-site surveillance of scheduled banks and non-scheduled banks with a deposit base of Rs. 100 crore and above based on a set of quarterly and annual returns.
III. Developmental Functions:-
- With a view to extending institutional credit support to tiny and cottage units, the Reserve Bank of India grants reﬁnance facilities to urban cooperative banks under the provisions of Section 17 of the Reserve Bank of India Act, 1934.
- There ﬁnance is given at the Bank Rate. Training is imparted to the middle and top management of urban cooperative banks through College of Agricultural Banking, Pune.
Sections / Divisions of Urban Banks Department
This Section handles staff matters of the department.
- New Bank Licensing and Branch Licensing:-
This section frames policies for issue of bank license /allots centers for opening of branches and authorizes regional offices to take action accordingly. It also deals with conversion of cooperative credit societies into urban banks.
Returns section at each of the regional offices is responsible for monitoring receipt of various statutory returns under the provisions of Banking Regulation Act, 1949, (AACS) and Sec 42 of
Reserve Bank of India Act 1934 in case of scheduled UCBs.
- Banks Supervision:-
This division arranges inspection of urban cooperative banks through regional offices and closely monitors the action taken by the Urban Co-operative Banks to rectify the irregularities / deﬁciencies pointed out in inspection reports. The division also associates itself with the RCS of respective states in rehabilitation of ﬁnancially weak Urban Co-operative Banks.
- Banking Policy:-
- This section frames policies on prudential norms, investment policies, monitoring priority sector targets, refinancing, issue of directives on interstates, CRR/SLR, etc. Policies relating to Para-banking activities such as merchant banking, hire purchase, leasing, insurance business, etc. are also formulated by this division.
- Besides, the section also attends to compliance with the directions of Local Board/ Central Board / BFS, furnishes requisite material for Bank’s publications such as Annual Report, Report on Trend and Progress of Banking in India, Currency and Finance, etc.
- Further, the section interprets the provisions of Banking Regulation Act l949(AACS), initiates amendments, coordinates with the Government, corresponds with various State Governments on matters pertaining to amendments of State Cooperative Societies Acts, coordinates with DICGC on matters pertaining to banks under liquidation, maintains and updates the list of urban cooperative banks, monitors cooperative credit societies having paid up capital above Rs.one lakh, watches compliance to Sec 9, 29 & 31 of Banking Regulation Act, attends to cooperative banks going out of the purview of Banking Regulation Act etc.